"16.98 / that's the day rate / they don't ask questions / or write down your license plate"

[larryhammer]

My takeaway from this Wired feature on "Recipe for Disaster: The Formula That Killed Wall Street" is that everyone in the market started using a formula for estimating risk that's built on the assumption that the market accurately estimates risks. And as you know, Bob, if you don't have enough historical data to estimate risk, neither does anyone else. The entire system of pricing credit default swaps and collateralized debt obligations had a positive feedback loop built into it. (I lost track of who to hattip for this)

Speaking of the current -- but I should do this properly, as I apparently have enough ingredients for another linksalad. Time flies when you're wasting it online. So speaking of:

• The crisis of credit, visualized part one and part two. (via)
  
  
• Alas, buymeaclue, financial system rescue plans do not go better with zombies.
  
  
• The difference between fantasy and science fiction, explained. (via ogre_san)
  
  
• Via all over, I still want to see Sita Sings the Blues in a theater, but I'll settle for online.
  
  
• "Nom Nom Nom Nom Nom Nom Nom". Or if you prefer something more human, Japanese lifecycles as documented by bento boxes. (via)
  
  
• Monsters of Japanese folklore, mummy edition.
  
  
• Yes, Virginia, that really is a hot pink dolphin in the water. (via)

---L.

Comments

[nineweaving.livejournal.com]

that really is a hot pink dolphin in the water

Shades of Joan Aiken!

Nine

[larryhammer]

Among others.

---L.

[packbat.livejournal.com]

*catching up with open Firefox tabs weeks later*

Wow, this was a real pileup of a disaster, wasn't it? First, interest rates were low, driving investment into the private sector; second, credit default swaps were turning into a huge industry; third, Li's Gaussian coupla equation set up instability, as you describe; fourth, the investment brokers looking for more mortgages to sell noticed that no-income-no-asset mortgages actually have a historically low default rate (http://bradhicks.livejournal.com/417710.html) without realizing that it's because historically, they're made by a banker to someone the banker knows personally (http://slacktivist.typepad.com/slacktivist/2008/11/how-i-beat-the-market.html); and fifth, they assume housing prices will always go up in all their calculations.

One, two, and three put the power behind the positive feedback loop, and four and five gave it the push. And we all fall down.

[larryhammer]

Yup -- that's exactly it.

---L.

[packbat.livejournal.com]

So the most obvious fix on the government side is to (1) avoid adding fuel with low interest rates, when you can, (2) identify and discourage positive feedback loops, when you can.